Teach Your Child the Value of Savings
As parents, we have a unique opportunity as well as a tremendous responsibility. Many adults are not financially savvy and do not know how to handle their money, but we must teach our children the fundamentals. Even a young child can be taught the difference between "want" and "need" and the concept of delayed gratification. Obviously, the best teaching method is by example. How can a young child understand that the money supply is not unlimited if we constantly respond to her every demand? Television advertising -- especially during the holiday season -- makes it even tougher for parents.
Many of my suggestions are grounded in my background as a financial planner but also, more importantly, as the mother of two now grown sons. One of the toughest lessons a parent can share with children is the need to be responsible with money, whether earned or received as a gift as for a birthday. We always gave our children an allowance appropriate to their age and spending needs. Of course, they never felt it was enough. How many adults truly feel that they have enough? This is probably the first step toward learning to live within one's means and establishing a budget.
Children are smart. From a very young age, they can understand that by saving a little bit from each allowance, they will eventually have enough to buy a large item. I recommend that clients with young children establish a savings program with their children, similar to an employer matching contributions to a 401(k) plan. For every dollar the child saves, the parent can match it either dollar for dollar or 25 cents for each dollar or whatever provides the needed incentive to save.
It is possible for a young child to open a passbook savings account with the parent as co-owner. It is important that the child see the amount grow, either by presenting the money directly to the teller and watching the transaction or by seeing the statement of the value of the account. Handing the money to a parent is not as effective as using a non-related, institutional third party.
Opening a savings account is a great opportunity for parents to explain that money in a savings account earns interest while it is waiting in the account. It is often helpful for a child to set a short-term goal for the money, such as a new toy or other inexpensive item, so the goal can be realized in a relatively short time period. Nothing succeeds like success, and it is easier to begin saving toward something else after the first goal has been realized. The time horizon can get longer as the child gets older and understands delayed gratification.
The lessons learned by saving also help children realize that parents cannot buy "everything" they see. It is never easy to refuse a child's request, but we are teaching an important lesson when we say "no" and share the explanation for the refusal.
During the holiday season, the temptations are undeniably greatest. Everywhere a child turns, advertisements abound, toys entice, displays beckon. The message the stores give out is clear: "You need this toy to be happy, to belong." Even if we had unlimited resources, we would be doing our children a great disservice if we purchased everything they request. Have your child make a list of the things he really wants, and then explain that he needs to select one or two items from among the many listed. He'll learn to prioritize his selections and make a decision.
Another important lesson to share during the Christmas/Hanukkah season is generosity. Help your child understand that it is good to give as well as receive. Even with a small allowance, a child should be encouraged to give small gifts of his own choosing. As a parent, you will probably be given gifts you wouldn't necessarily choose for yourself. I still treasure a "terrible looking" necklace that my sons bought for me at a garage sale. The gesture and the care that they put into the purchase touched me, not the value of the gift.
You also can encourage children to give to those in need -- let your child choose a toy she no longer plays with, and take her with you to donate it.
The lessons we teach our children provide the framework for their savings and financial attitudes for a lifetime. By helping our children learn financial responsibility early on, we're starting them on the path to success.
For more information on financial planning topics, or if you need a financial planner, consult the International Association for Financial Planning's Web site at http://www.iafp.org or contact them toll free at 800-945-4237.
How Much Allowance Should I Give?
Before you give your child an allowance, think about what you hope he learns from having one. An allowance refers to discretionary funds not earmarked for such items as lunch money or school activities. Keep in mind your child's age, and decide what chores he will need to do in order to receive his allowance: making the bed, doing the dishes, setting the table and keeping her room clean are popular standbys. Make sure your child understands that if the job isn't completed -- without constant parental prompting -- the allowance won't be paid.
A weekly allowance gives more opportunities to reinforce saving and budgeting activities. A general rule of thumb is 50 to 75 cents/week per year of age works out well (for example, a 6-year-old would receive .00 to .50/week). Obviously, the amount will depend on the parents' circumstances as well as the cost of living in a given area.